The immoral housing bubble

LONDON — I don’t know how many readers of POLITICO have had the misfortune to try buying a house in London over the past few months — as I have (and am still doing) — but short of war, famine and Donald Trump’s company, a less pleasant experience could hardly be imagined.

Aside from the joylessness of dealing with estate agents, paying surveyor’s fees of thousands of pounds, and making lawyers wealthy, the sheer madness of London’s house prices, much worse than even New York, is unbearable. Right now, if you want a three-bedroom house with a garden in Zone 2 on London’s Underground map, it is hard to find anywhere for less than £1 million — that is, around 30 times average earnings. Everybody — everybody — has a horror story to tell, about being ‘gazumped’ (look it up, it’s a very British word), or about dodgy dealings and killer last-minute bills. And yet, because houses are meant to be homes too, everyone is forced to sign up to participate in this racket. It is daylight robbery by another name, but all of us are in on it.

Housing is the greatest scandal in modern Britain. In this essay I want to examine the curious historic journey of our current property madness, highlight the hypocrisy of recent policy, give a warning about where it is leading us, and argue that many of the biggest and worst social changes in our time have a common origin in the reprehensible failure of successive British governments to do anything about it. Finally, I will suggest two modest changes in taxation which may help restore justice and sanity to our disgraceful and demented property market.

* * *

The phrase “property-owning democracy” is usually attributed to Noel Skelton, a Scottish Unionist MP of the interwar years. He saw property and democracy as causally linked: citizens who owned the roof over their heads would feel more deeply invested in their surrounding neighbourhood, having a sense of pride, responsibility and attachment that the looser connection of renting fails to generate. Private control of houses would, by a pleasing inversion, increase public solidarity. Three decades later this sentiment drove Harold Macmillan, the pragmatic Tory who David Cameron resembles politically, to build 350,000 homes per year — unimaginable now, when we just about get to 140,000.

In her first term in office, Margaret Thatcher seized on Skelton’s phrase and adopted it as her own. For her there was an umbilical connection not just between property and democracy, but — via the engine of property — between democracy and capitalism. Capitalism is a way of owning things; spreading ownership is the proper task — not always achieved — of governments that embrace capitalism. Thatcher believed that if she could spread ownership, she would not only wrench Britain from the more socialistic Seventies, she would also infuse the working classes, as they were still known then, with conservative values.

Expensive properties in an affluent area of London | Getty

One of the most important early achievements of Tony Blair was that he persuaded others on the Left that they were wrong to let conservatives own the idea of ownership. Not only was it natural to want to own a home, for comfort and security (both economic and physical); it was also vital for the egalitarian cause. Allowing the rich to monopolize the housing market actually increased inequality.

Fatally, however, New Labour’s support for property ownership combined with other economic factors to create one of the most remarkable booms in financial history. Booms are by definition unsustainable; this one is no different, but a lot of people have got very rich in the process, often taking on levels of debt so astronomical that no government would dare jeopardize the upward trajectory of house prices. Loose monetary policy, reckless bank lending, and demand far exceeding supply — especially here in London — has caused property to be one of the most reliably rising asset classes anywhere. Because it is liquid, too — that is, you can always sell your house — it has been an invitation to mass speculation on a scale hitherto unseen. And it has been an invitation to phenomenal hypocrisy by Britain’s ruling elite.

* * *

For many years, the likes of Cameron and George Osborne talked about the need to move from Gordon Brown’s “borrow and spend” economy to a “save and invest” economy instead. Now that they are in power, however, they find that of the four economic booms that generated economic growth in the New Labour era — immigration, private debt, public borrowing, and property prices — the last one was most important. Britain’s consumers are in so much debt that only surging property prices will give them the confidence to spend money, so creating the economic growth that keeps Tories in government. Allow the property bubble to burst and you’ll destroy the good feeling in the High Street. To adopt Warren Buffett’s immortal formulation, if that particular tide went out, we’d see that all of Britain was swimming naked.

Britain is building a paltry 150,000 homes per year, less than half what is needed.

In recent budgets and economic policy, the Tories have reverted to something closer to Thatcher’s model. They talk openly about extending ownership, and have flagship policies to go with such talk. Help to Buy, nicknamed Help to Buy Votes, was a signature policy of the Conservative-LibDem coalition government, giving better access to finance for people trying to get onto the housing ladder. Ahead of the election, Cameron announced Right-to-Buy, a reheated version of Thatcher’s property revolution, in which she let council tenants buy their home.

Neither of these comes close, however, to addressing the root cause of the problem, which is the abysmal failure to build enough homes, and so match demand with supply. Shortly before the election, a very senior Tory MP told me that the answer to the housing crisis was obvious: build on the Green Belt, a misnamed area of land which is often ugly and poorly served by transport, though occasionally — as with an area west of London known as the Chilterns — very beautiful. “I think the days and weeks before an election may not be the best time to build on Tory constituencies”, my lunch companion said, shamelessly admitting that it was a concern for Tory MPs on the outskirts of London that stopped the urgently needed development from happening. As a result, Britain is still building a paltry 150,000 homes per year, less than half what is needed, and less than half what MacMillan managed.

Over lunch at Les Deux Salons in Covent Garden last year, another Tory MP, Grant Shapps (then party chairman) told me that while building more homes was clearly a priority, there were two other pillars to the housing crisis. The first is access to finance, which Help to Buy was meant to address. The second is reforms to planning law, and, in fairness to the coalition, they did make significant progress on this front under the watchful eye of Nick Boles MP, the planning minister.

Whatever modest success there may have been on that score, and however many pledges we may have heard about housebuilding, the sorry fact remains that insufficient new supply is making this problem worse and worse — in the south-east of Britain at least. House prices rose by an average 19 percent in London last year. So someone who inherited a £2 million house from his parents — and there are tons of these in our modern city — made £380,000 in a year just by sitting on his backside. That’s more than his cleaner would make in, say, 12 years of wiping toilets and scrubbing floors. And don’t forget that in some areas, such as Kensington and Chelsea, house prices grew by a lot more than 19 percent.

* * *

This glaring injustice, in which asset owners are able to pull ever further away from those who don’t own assets, not by their industry or entrepreneurial zeal but just because they had money to begin with, has become not just a defining feature of the society in which we live, but the defining feature. You can surmise that from the fact that several of the most urgent moral challenges of our time have their roots in the economics of housing.

Here, just for starters, are six of them. Each deserves an essay on its own, of course; but for now, I wish to propose that all of the following have a shared fundamental cause in our housing crisis.

1. Inequality

Nothing — nothing — has done more to increase inequality in modern Britain than rampant property inflation. The rich own assets; the poor often don’t. The rich are able to pull away even if they sit idle, just by investing in property. If you have a spare million, why bother working? Invest smartly in London property and you can make a £100,000 in a year by doing nothing.

2. Work is no longer the route to wealth

It used to be that people with an above average education could expect an above average salary and therefore have an above average quality of life. No more. Yes you can get above average salaries; but if you want a really good life — which may include a lovely home in a safe, leafy, reasonably central area — you will struggle to get one through work. You have to speculate to accumulate. This fracture in the connection between work and wealth is almost unimaginably consequential. Blame housing.

3. The end of saving

Conservatives are supposed to prize the idea of saving. It involves deferred gratification, and a stronger connection between generations. But with interest rates extremely low, houses have become pensions. Rather than put aside funds every month, people are taking on huge debt to invest in housing, knowing they’ll get a much better return that way.

4. Inter-generational injustice

Because young people, and especially poor young people, can’t get a home unless they inherit, they are watching older asset owners pull ever further away from them. Inflation in house prices on the scale we now see amounts to a phenomenal transfer of wealth from the young to the old.

5. Planet London

Everyone knows that London is becoming less and less like the rest of Britain. Immigration is a major driver of this. But housing is the main cause. Whereas house prices rose by an average of 19 per cent in London last year, they fell in many other parts of the UK — by 1.1 per cent in the North East, for example. This fuels the sense of grievance felt by the majority of Britons who don’t live in our capital.

6. Delayed marriage and parenthood

One of the most extraordinary social changes of recent decades is that Britons are getting married and having kids later. In 1981, the average British woman got married at 23.1. Thirty years later, it was 30.1. For men, it has risen from 25.4 to 32.1. This is an astonishing development for so short a period. Partly it is driven by positive developments, such as many more women entering the workplace. It is also driven by a cultural endorsement of freedom, and the idea that we can delay adulthood and commitment for longer. But economic factors determine this more than anything: and the fact that it takes many more years to get a deposit for a house together is not a good thing. Watch out for companies paying women to freeze their eggs, and rates of fertility treatment rising, to meet this delayed marriage and parenthood phenomenon.

* * *

I don’t suppose for one minute that a single paragraph is sufficient treatment for social phenomena on this scale. I merely put to you that there is a common cause here, and that cause is housing. If you asked senior members of the Labour or Conservative parties whether they were for or against inequality, work no longer being a route to wealth, the end of saving, inter-generational injustice, London becoming ever more dominant in the U.K., and people getting married later, they would probably all come down on the side of “against.” And yet neither party has come close to formulating a response that meets these challenges, though Tessa Jowell, the Labour candidate for Mayor of London, has some very smart ideas about building on public land.

Two reasons, by the way, that our political class has failed to do anything about our property market are as follows. First, they themselves depend on it for the bulk of their income, given they know they could earn more in the private sector, generally have at least one house in London, and — especially among the young new intake of MPs — haven’t made money before coming into politics. Second, those who benefit from owning assets tend to be older, and in Britain the older you are the more likely you are to both vote, and vote Conservative. That is why so many of Osborne’s policies, on pensions, inheritance tax, and indeed housing, are skewed toward the benefit of the old, and against the young.

* * *

What is to be done?

I don’t hold out much hope, and if the moral case for addressing our housing crisis fails to find support in Westminster, I don’t imagine the intellectual case for how to fix it will prove popular either. But it is patently obvious that if one object of taxation is to incentivize socially beneficial behavior, and disincentivize socially costly behavior, Britain has to shift the burden of taxation from work to unearned wealth — that is, land and property.

London homes for sale — for the rich only | Getty

A land value tax is eminently sensible: the value of land rises not because of the endeavor of private landlords who own it, but because of public investment in surrounding infrastructure and amenities. Similarly, it is beyond all definitions of basic decency that council tax bands are nearly a quarter of a century out of date. Adding new council tax bands would be much better than a mansion tax, as proposed by Labour but dropped by the Lib Dems: there is already an existing system in place for council tax, the money would be raised locally and spent locally, and it cannot be right that no new bands have been added since the early 1990s.

Alas, such suggestions seem to be futile at the moment. Housing policy has little to do with rationality and reason, and everything to do with hypocrisy, cynicism, and injustice. The dream of a property-owning democracy long ago turned into a nightmare, and it seems painfully clear that this all-consuming boom will go on until there is an almighty crash, leaving the debris of countless shattered hopes in their wake. This is the abysmal truth about the greatest scandal in modern Britain. We have an economy built on a property bubble, and a political class who need to get re-elected long before that bubble goes pop. By then it will be someone else’s problem — our children’s.

Authors:

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Ricardo

Bite the bullet and move to new cross or brockley

Posted on 8/10/15 | 9:05 AM CEST

MGSPhiladelphia

If you are sitting on a property which has escalated exponentially in London/SE England, when you sell, and the day is done, where are you going to live? I think I’ll buy a 5-bedroom in Hull. This property myth bites people in the rear because we all need shelter, and it is very very hard, indeed, to clamber down the property ladder once you’ve had the sweet smell of property appreciation…otherwise what good is property appreciation…heading for a bubble that’s for sure, repeating the mistakes of the past is no new phenomenon, and greed behind the scenes is driving this spiraling mess. Thank you for the insightful editorial.

Great Britain? There has been nothing “great” or “bright” about that place for two centuries. Brits are worthless, toothless socialists and love being overrun by muslims who hate the West, and have lowered themselves to the bottom of the barrel. They deserve the failure they have become, and nothing will change for the next 300 years, except sharia law and speaking arabic instead of english.

Posted on 8/10/15 | 5:11 PM CEST

Ed

I think this is a very good article other than that I think you’re too harsh, and not harsh enough, on the MPs. I don’t think their primary motive for stoking the bubble is immediate pecuniary self interest. Instead I think it’s fear at what a house price crash would do both to their popularity in this house owning democracy (count the votes of the sixty four percent of the population who are owner occupiers, not all elderly) and at the hell which would be unleashed on the economy from a loss in consumer confidence (as the article acknowledges elsewhere). One Labour MP pretty much admitted the latter point to me when I haraunged them about unsustainable house prices prior to the last election, although I don’t know if that were a personal view or a party line.

To partially mitigate against the downturn in confidence from a house price correction, I would suggest that all the money which is currently being pumped into economically illiterate products to keep the bubble blowing (eg help to buy) could instead be better used to offset a substantial portion of the negative equity which anyone who has bought a home to live in recently would find themselves in. I know this isn’t ideal but I don’t think there are any ideal solutions to this sub optimal situation. For the avoidance of doubt I’m not proposing any compensation for those who bought pre bubble and have grown fat off of house price accumulation. Nor am I proposing any help for the buy to let brigade. Oh and I would hope that the flip side of a house price correction is that this would improve consumer confidence amongst the younger generation, who are currently seeing a gouge watering proportion of their monthly income going out in housing costs.

Posted on 8/10/15 | 10:07 PM CEST

Me

Great article! Just one thing to add: council tax should be levied on OWNERS of property, not those domiciled in the property.

Posted on 8/11/15 | 8:43 AM CEST

RJ2012

There are also other spill-over effects outside the UK. If you look at holiday homes in sunnier parts of Europe there are a whole ton of Brits who have cashed in on their house in London and bought up large properties to run as holiday businesses. I imagine places like the Dordogne have experienced significant impacts (positive and negative) due to an inflow of money that was originally made on the back of extraordinary rises in value of London property.

Posted on 8/11/15 | 9:51 AM CEST

bodiddleysunderpants

Excellent article on the whole. The lack of supply is an inevitable consequence of the way we treat land as a commodity like any other when the classical economists all correctly identified it a a separate and distinct factor of production. Adam Smith noted land was a ‘natural monopoly’, and as a consequence of this economic rent accrues to it, during a boom land prices will be bid up well in excess of even house prices, developers and speculators become inevitably conflated as they seek to maximize profits by drip feeding the market during the upswing and then ‘become more selective’ in their projects (aka run for the hills) when the land price passes the point of inflection, what else can they do? No developer wishes to be lumbered with a half finished project just as the bottom falls out of the market.
Economist Fred Harrison has identified the land price cycle, and has correctly called the last two crashes in the UK as well as the Japan crash. The cycle consists of a downturn period, which Keynes noted was usually between 3-5 years, and following this a just over 14 year upswing most often punctuated around year 7 by a mini downturn, the second upswing that follows tends to be far more extreme, and can be called the ponzi or Minsky stage. As land prices bottomed out in 2012, we can expect a downturn around 2019, this will not likely crash house prices, should no remedial action be taken, the full cycle following in 2026 will be at least as damaging as the 2008 crisis.

Posted on 8/11/15 | 3:33 PM CEST

kay

It’s mainly a product of all the foreigners fleeing their inferior countries for the UK. Stop open borders immigration and the market would behave normally.

Why must the author live in zone 2?

Posted on 8/11/15 | 4:00 PM CEST

kay

Every article about the UK at Politico just lies about and trashes the UK. Gore Vidal was right when he said the US medias’ coverage of foreign countries was just a series of smear jobs.

Posted on 8/11/15 | 4:03 PM CEST

bodiddleysunderpants

‘it’s mainly a product of all the foreigners fleeing their inferior countries for the UK. Stop open borders immigration and the market would behave normally.’

Erm no, that’s clearly fallacious simplistic UKIP drivel, not an empirically sustainable position. The UK is only densely populated comparable to other Eurozone countries, we are barely over 1% as populated as the most dense regions on earth yet our house prices are some of the highest per capita.
Around 11% of the UK is characterized as ‘urbanized’ and about half of that is green space. Many regions of the UK are underdeveloped and as a consequence underpopulated. The question of whether UK should take in more or less migrants is quite separate from the intrinsic dysfunctionality of an under-taxed subsidized property market . Should we blame foreigners for investing in free capital gains when Osborne pours every resource into pumping up the bubble? And any reasonable analysis from the ONS reveals we are clearly not the full up small island of tiny minded little Englanders legend. Ukip’s housing policy is a joke of more subsidy to land coupled with a promise not to mess with the free market, and concocted by a millionaire BTL landlord no less. Blaming foreigners might attract easy votes of the gullible, but it will fix nothing.

Posted on 8/11/15 | 11:05 PM CEST

Stewart

Good article, except that simply building more isn’t the solution: not unless you are talking about building lots of high quality units for social rent. Otherwise we will just get thousands more luxury and BTL apartments and still no Londoners will be able to afford them.

Posted on 8/12/15 | 4:42 PM CEST

Paul fear

PRIVATE BANK CREATED CREDIT! That is what is at the heart of this. Money is basically a quantifiable unit of labour. Private banks can create money out of thin air. they in effect counterfeit the unit of labour. This devalues YOUR work, the credit is held in housing assets. When credit stops which it will very shortly, because repayment of credit has exceeded money supply, housing will return to its true value, real units of labour. A lot of people will be hurt.

Posted on 8/14/15 | 8:00 PM CEST

Fixpir

Excellent article. The situation is similar, if not currently at the same level, in other parts of Europe, especially Paris.
I read last year in the journal Libération an article summing up lives of four people having bought up in the 70s flats in the north of Paris (18-19-20ème arrodissements). Basically, those guys earned their lives over the years a first time by working, and earned the same amount or more with their property price rise over the period*.
As our societies do no longer value work, but property, it is heading toward (actually we are inside at the very moment) a paradigm change. Read Piketty to understand the consequence. Read Jane Austen to feel what type of society is coming (back). Hate of work and of working people, total separation of the society between the have and the have not, importance of capital and annuity.

I assisted some years ago to events in Paris about “how to capitalize startups” etc … Speaking of typically 100k€+ to startwith BAs, 1Mon€+ second round. From the window, we could see Paris landscape. So, we were endlessly discussing about how to get the money to finance some startups, but any of those tens of thousand of buildings we could see through the window had a value that could have financed ALL the startups in France for years !

So, I would add a n°11 point to your list. Money invested in real estate is not invested in job generating industries or services. Real estate is siphoning investment out of productive area.

*This being Libération, they tried to depict those persons as poor victims of the property rise problem. They doubled their income, but they are victims ! For Libération, there are only two categories of people, the poor sympathetic victim, and the big bad ugly capitalistic wolf.

Posted on 8/14/15 | 11:53 PM CEST

ExLiberal

“Housing policy has little to do with rationality and reason, and everything to do with hypocrisy, cynicism, and injustice. ”
This article has little to do with rationality and reason, and everything to do with hypocrisy, envy and hatred.

Posted on 8/16/15 | 7:02 PM CEST

Peter

Nothing new here that hasn’t been discussed on the hallowed forum of housepricecrash.co.uk over the last ten years or more. Do keep up old bean. Gazumped.

Hold Cash and wait for the london house crash!
The bubble in london will burst, house prices in zone 3 are double the peak of the financial crisis.
I am writing all the truth at http://londonhouseprice.com

Posted on 9/28/15 | 9:20 PM CEST

Ross

I don’t think taxation would solve the housing crisis. This article only looks at home ownership and the assumption that people who live in £1million+ homes can afford greater council tax bills. The article doesn’t mention that by 2025 most households in the UK will be privately rented. Upping council tax bills will just raise rents further for people who can’t afford to buy. In London this will penalise everybody who rents, purely because of inflated house prices. The best policy would be to shift from building for home ownership to building private rental accommodation. Cheap, long-term and secure accommodation backed by government-funded housing associations is what’s needed, not ownership. Let’s copy the Dutch, German, and Scandinavian model and reduce our culturally embedded need to buy houses.